Subsidizing The Rich Through California's Solar Scheme

Dr. Zycher is the John G. Searle scholar at the American Enterprise Institute.

Solar panels used to generate power outside an office building in Los Angeles, California last August. (MARK RALSTON/AFP/Getty Images)

Residential consumers of electricity in California pay almost 17 cents per kilowatt-hour (kWh), a price higher than those of every other state in the lower 48, except New York and five of the New England states. The average for the nation as a whole is about 12.7 cents per kWh. Neighboring states in the Pacific Northwest, the Mountain region and the Southwest enjoy rates lower than California’s by about 30-45%, and even California’s high prices obscure a number of costs hidden--but not avoided--with various tax and regulatory policies.

One such policy is “net metering,” an important system of shifting the costs of rooftop (“photovoltaic”) solar systems onto the consumers of electricity generally, with adverse implications for costs and for the future reliability of the electric grid. The California Public Utilities Commission has an opportunity to impose limits on this cost shifting system.

How does net metering work? Power consumers who install solar panels--large subsidies are paid for such installations--receive a credit for the power that they produce but do not consume. The excess electricity is transferred into the power grid for use by other consumers, and the owners of the solar systems receive a credit for the excess power, paying only for their “net” electricity consumption.

Subsidizing the rich

So what’s the problem? First, the credit paid in California for the excess solar power is far higher than the cost of alternative electricity sources, usually from utilities or from the spot power market. Consumers without such solar installations have to finance that excessively expensive electricity, so that overall power prices are forced above the level that would prevail in the absence of the net metering system. This system, by the way, subsidizes the affluent (median income of those installing solar systems: $91,210) at the expense of all other power consumers (median of $67,821), an embarrassing reality from which the supporters of the net-metering system prefer to avert their eyes.

Second, reliability is a hugely valuable attribute of power systems; no one likes blackouts. Electricity bills reflect the cost of that reliability in the form of “capacity” charges, that is, the part of the bill covering the cost of the physical system and its spare capacity, before fuel expenses and other such generation costs. People who install solar systems benefit from the reliability provided by the grid--they consume conventional power at night and at other times that the sun fails to shine--but because they pay only for their “net” power consumption, they get a free ride on the cost of the generation equipment and other capital that yield the reliability upon which they depend. The problem is that the free ride is not free: Other consumers have to pay for it.

An upward price spiral

In addition to the net metering system, which subsidizes the production of rooftop power, there also are large tax and other incentives to install solar systems. These installation subsidies mean that far more solar capacity is installed than otherwise would be the case. Accordingly, more rooftop solar power is produced, more such power is fed back into the grid at prices inflated by the net metering system, and the prices paid by other consumers are forced higher, in a sort of upward spiral. In short, the installation subsides exacerbate the problems created by net metering. The solar industry received just such a Christmas gift last month when Congress extended the investment tax credit for the installation of solar systems.

Net metering receives strong political support in substantial part because it is useful politically. All subsidies--direct, indirect, explicit or hidden--must be financed by someone, be it taxpayers, ratepayers or the beneficiaries of other government programs. Political incentives to hide the costs of such policies are powerful--it is better for bureaucrats and politicians that the losers not know that they are losing--and net metering serves that end beautifully.

California's regulators should stand with consumers

Given the adverse effects of these large power costs on business competitiveness, on employment growth and on the pocketbooks of ordinary Californians, one might think that policymakers would take actions to reduce them. The California PUC has a golden opportunity to do just that, by increasing the capacity charges that rooftop solar consumers pay, and by reducing the prices paid for excess solar power. Is it not, after all, the PUC’s job to “protect consumers” by imposing stronger limits on the net metering system and the upward pressure on rates that it creates?

It can be done: The Nevada PUC last month voted to end that state’s net metering system. The Hawaii PUC has reduced the net metering prices paid to new solar customers. California’s regulators should stand with consumers rather than the solar producers and investment houses benefiting from this version of crony capitalism.